Texas Federal Court Overturns DOL's 2024 Overtime Rule Nationwide

Coincidentally, one day after issuing our insight, the U.S. District Court for the Eastern District of Texas issued a decision on the consolidated motions for summary judgment in State of Texas v. DOL and Plan Chamber of Commerce, et al. v. DOL.

The court concluded that the Department of Labor ("DOL") exceeded its authority and vacated the DOL's April 2024 rule in its entirety. It made clear that its decision applies to all employers nationwide and is effective immediately. This means that the salary threshold increases that went into effect in July 2024 and that were intended to go into effect on January 1, 2025 (and thereafter) are invalid and unenforceable.

Court's Ruling and Analysis

The court examined the DOL's rulemaking history from the FLSA's enactment in 1938 to the present. The DOL's focus in adjusting the salary-level test has historically been to set "low minimum salary levels designed to exclude only obviously nonexempt employees, premised on wage-data for the lowest-wage region, the smallest-size business establishment group, the smallest-size city group, and the lowest-wage industry," and in a manner "consistent with serving only the purpose of separating exempt from nonexempt employees, not improving the status of such employees." The DOL's successful rules have generally followed the principle that a minimum salary level should not disqualify more than 10% of employees who meet the duties test.

In support of vacating the DOL's 2024 rule, the court explained that the July 1, 2024, increase raised the salary level to the 20th percentile for weekly earnings of full-time, salaried workers in the South and/or retail industry nationally based on contemporary data. According to the Department's data, before the July 2024 salary-threshold increase, about 20% of otherwise exempt employees (under the duties test) were classified as nonexempt. After the July 2024 increase, about 30% of otherwise exempt employees should now be classified as nonexempt.

Similarly, the January 1, 2025, increase will raise the minimum salary level from the 20th to the 35th percentile, causing somewhere between 30 to 50% of otherwise exempt employees to be classified as nonexempt.

The court found that both the July and January increases go too far beyond the DOL's standard principle that the salary threshold should not disqualify more than 10% of employees who meet the duties test.

The court also struck down the rule allowing automatic increases to the salary threshold every three years beginning July 1, 2017—otherwise known as the "automatic indexing mechanism." In 2004, the DOL previously took the position that this mechanism was beyond its authority. Despite this, the DOL attempted to implement an automatic indexing mechanism as part of its 2016 rule, but this rule was also struck down by the court. Here, the court again found that this mechanism was beyond the DOL's authority and improperly evades the notice and comment and other requirements of the Administrative Procedure Act.

Although the court did not discuss it in depth, it made clear that its opinion regarding legality of the changes to the standard salary level applies equally to the changes to the salary threshold for highly compensated employees.

Key Takeaways for Employers

• The DOL's prior 2019 rule currently applies, which includes a salary threshold of $684 per week, or $35,568 per year. The "highly compensated employee" exemption salary threshold remains $107,432.
• Employers no longer need to review their exempt positions in anticipation of a federal January 1, 2025 increase. However, many states have enacted legislation that will also increase salary thresholds on January 1, and those state laws are not affected by this decision. Therefore, employers may still need to review exempt positions in anticipation for January 1 state-law salary threshold increases.
• Employers could potentially reverse any salary increases that were put into effect due to the July 2024 increase. However, employers should seek legal counsel before doing so.
• Employers should still keep in mind the applicability of all state minimum wage and overtime laws, which are often more employee friendly and which are not affected by the court's decision.
• The DOL could still appeal the court's decision to the 5th Circuit, so employers should continue to stay up to date on this topic.